Economics & politics of the Pre Budget Report

The political message of the Chancellor’s Pre Budget Report this week is that despite the deep recession caused by the banking crisis, Labour will protect frontline spending in the NHS, schools, and the police service. Spending elsewhere will have to be lower as savings are found. This will not be easy. However, Labour is not prepared to reverse the gains we’ve made as a country on improving healthcare, education, and in cutting crime. Bank’s will be discouraged from paying out large bonuses this year since bank profits have depended upon taxpayer support both direct and indirect. Funds will be directed to combat youth unemployment.

Another key message is that the government will not risk the recovery by cutting back on spending too soon. When debt as a percentage of national income is too large, you can tackle it by both paying down the debt and by increasing growth. That’s why the Chancellor’s commitment to the new high speed rail lines is so important. Investment in infrastructure helps make the economy more productive and that boosts growth in future.

As far as the big picture is concerned, Alistair Darling’s statement changed little. While the economy is now forecast to shrink further than expected this year, the estimates of the deficit this year have risen from £175bn to £178bn – less than had been expected. Another key macro point is the Treasury’s assumptions about the loss of output. In the Budget in April it estimated that the UK’s productive potential was less than previously assumed and that the structural budget deficit (that part that won’t shrink automatically into recovery) would be 9.8% of GDP this year. The Pre Budget Report suggests this wouldn’t be quite as bad, at 9.0%. It means that there is slightly less for the Chancellor to do to bring debt down.

This must have been the most difficult Pre Budget Report to write. Last year the world was reeling from the banking crisis and the government had taken decisive action to support the financial system. This year, while the financial system is not yet in full health, we have had a year of deep recession. Though growth is forecast to bounce back as businesses build their inventories back up again, recovery will take time. Most people know that. The role of the Pre Budget Report was to show that action is being taken to tackle the deficit while not risking recovery. Alistair Darling succeeded in that aim.

Recent opinion polls are not conclusive but they remind us that there is still much to fight for in the election. Labour must focus its manifesto not just on what we have done to help the economy and financial system. We must focus clearly on what we stand for and what we will do in government in the next four years.

10 December 2009, 10/12/2009


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